Debenhams - The Spectre of Woolworths

Debenhams (DEB.L): The question is still the same. What is the point of Debenhams? The same can of course be asked of House of Fraser and BHS. The challenge for these High Street veterans is to knuckle down like W H Smith, or to aspire to the relevancy of Next and John Lewis. The alternative is the spectre of Woolworths’ slide into the history books, without 007 to help.  In today’s Finals, to 29^th August 2015, Transactions were up 1.3%, whilst Group LFL sales were up 2.1%, (but only +0.6% after currency moves and on a slowing quarterly trend). One of their battles has been to reduce promotional activities (the creeping plague of Blue Cross days for example). Some progress has been made, with 17 fewer promotional days (and 42 down on FY2014) leading to a 90bps markdown improvement, thus helping to hold overall gross margins flat, albeit slightly short of guidance. This left pre-tax profits up by an in-line 7.3% at £113.5m and basic eps up 7.0% at 7.6p, whilst the full year dividend is maintained at 3.4p. On the balance sheet, good cash generation (helped by better stock control) saw net debt come down by £41.7m to £319.8m, leaving net debt to EBITDA at 1.3x against 1.6x a year ago. This already seems fairly healthy, but the group is toughening the medium term target from 1.0x to 0.5x. Whilst they talk of a new progressive dividend policy, clearly more cash will be retained in order to pay down debt and (with some EBITDA growth we hope) meet this target. The medium term dividend cover target is now set at 2.5x.

The way ahead for the group is to further develop their multi-channel offering, expand the international operations (to 30% of Group transactions) and to utilise spare UK space by introducing more concessions. Whether an initial eight Sports Direct concessions is sufficiently aspirational, is for you to decide. Mind you, with Mike Ashley punting the shares the Board may feel obliged to co-operate. In these results they say that on-line sales were up 11.4%, representing 13.6% of group sales, against a long-term target of 30%, whilst “Nine by Savannah Miller” was their best ever brand launch. They now operate from 248 stores in 27 countries, with 161 being in the UK. A new CEO will take all these plans forward, as Michael Sharp is sticking to his plan to walk away next year after five years at the helm. They reckon that they can absorb the impact of the National Living Wage, so there might be enough here to at least hold consensus forecasts at 7.8p. At today’s perky 85p, that is a modest PE of 10.9x. Dividend cover this year was 2.24x, so a slight tweak to 2.3x on the route to 2.5x, leaves my dividend forecast at 3.39p for a yield of 4.0%. That all looks cheap, but in the age of clicks ‘n’ bricks I still worry that large department store chains are structurally too disadvantaged. The prize is that if John Lewis can flourish, there must be space for others to do likewise. The shares have been a good trading stock during Michael Sharp’s tenure, without holding on to any advances, with the high ground above 100p being lost to those mysterious snowy profit warnings a couple of years back. I would now wait for the new CEO to be announced next year, with a good appointment potentially being the catalyst that investors have been looking for. (Neil Cumming^, 22^nd October 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower